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Double digit growth momentum sustained

Infosys Limited provides IT consulting and software services, including ebusiness, program management and supply chain solutions. The Group’s services include application development, product co-development, and system implementation and system engineering. Infosys targets businesses specializing in the insurance, banking, telecom and manufacturing sectors.

* Infosys posted strong revenue growth of 20.5% YoY in Q2FY22 (+19.4% on constant currency-cc basis) on robust growth across all segments.

* EBITDA margin shrank -230bps YoY to 26.5% (-10bps QoQ), primarily impacted by higher subcontractor costs and salary hikes. Despite lower margins, EBITDA grew 10.5% YoY (+5.4% QoQ), helped by strong topline growth. PAT also rose 11.9% YoY (+4.4% QoQ).

* Long-term outlook remains positive, as strong deals and digital transformation trends indicate growth momentum. We reiterate our BUY rating on the stock with a revised target price of Rs. 2,074 based on 34x FY23E adj. EPS.

Strong performance across all segments

Infosys reported 20.5% YoY growth in Q2FY22 revenue reaching Rs. 29,602cr, as company witnessed double digit growth across all business segments. Segment revenue growth was led by Manufacturing division (+43.7% YoY, aided by Daimler deal ramp-ups), followed by Life Sciences (+25.8%) and Financial services (+21.5%, strong demand and momentum across all regions).

Regionally, North America revenue rose 23.1% YoY growth on cc basis, while Europe and India posted growth of 19.6% YoY and 4.2% YoY, respectively, on cc basis. As a result, overall EBITDA grew 10.5% YoY to Rs. 7,830cr, despite contraction in EBITDA margin. EBITDA Margin shrank 230bps YoY to 26.5%, primarily impacted by higher subcontractor costs and salary hikes. PAT rose 11.9% YoY to Rs. 5,421cr

Key concall highlights

* On 8th September, Infosys completed buyback of equity shares worth Rs. 9,200cr (excluding transaction cost and taxes) and extinguished 5.6cr equity shares at an average price of Rs. 1,649/share (compared to a maximum buyback price of Rs. 1,750/share). This led to a 1.3% reduction in overall share capital. With this, the company has returned ~82% of FCF for FY20 and FY21 through dividends and buybacks, vs. 85% stated in their five-year capital allocation policy.

* The Board announced an interim dividend of Rs. 15 per share (+25% YoY).

* Company raised FY22 revenue growth guidance to 16.5-17.5% from 14-16% prior in cc terms, while EBIT margin guidance remains unchanged at 22-24%.

Large deal momentum sustained

Company won 22 large deals of over $50mn in Q2FY22, totaling $2.15bn TCV. This consists of 5 deals each in Financial Services and Energy Utility and Resources & Services divisions, 3 each in Retail and Manufacturing; 2 each in Communication and Hi-Tech; and 1 each in Life Sciences and Other segments. Regionally, 15 were from Americas, 6 from Europe and 1 from Rest of the World. The share of the new deals in Q2FY22 was 37%.

Valuation

While short-term outlook looks cautious given high valuations, we remain bullish on company’s long-term outlook, driven by large deal wins and digital transformation. We expect earnings to grow at healthy 15.8% CAGR over FY21-23E and reiterate our BUY rating on the stock with a revised target price of Rs. 2,074 based on 34x FY23E EPS.

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